In another article in Tax Free Today, we familiarized ourselves with the offshore options of Ras al-Khaimah, one of the Emirates in the UAE. The ICs there are considered to be one of the best options for offshore company start-ups.
However, you can go a step further. What online entrepreneurs dream about can become a reality for wealthy businessmen who are willing to relocate their production facilities abroad and move to a free trade zone.
Companies located in free trade areas have great advantages over their competitors. In today’s article you can read how trade areas work and how to register your company in a free zone in the United Arab Emirates.
What is a free trade area?
A free zone, also known as a free trade area, is a territorial enclave located outside the customs area of a particular country. A free zone can also form through the merger of several countries, creating a duty-free zone in a designated area. Since neither duties nor taxes are levied in a free trade area, they primarily promote trade and especially the import and export of goods of any kind.
With a free zone agreement, which several countries could also make to form a common free zone, all barriers that could potentially impede free trade are removed. Neither duties nor taxes exist inside a free zone. This accessibility of a free trade area attracts businesses from all sectors and all countries to settle here or to found new companies and corporations.
A free trade area, therefore, optimizes the movement of goods between individual countries and creates the possibility of securing imports from third countries or even excluding them altogether.
The most important types of free trade areas are:
- Free trade zone
- Free port area
- Export processing zone
Free Trade Zone
A free trade zone defines a geographical area within a state and can be established or located anywhere within a country.
The globalisation of large trading and manufacturing companies gives these businesses the opportunity to relocate entire production lines into the free zone which, of course, guarantees enormous savings on transport and exportation into other countries. However, they can also move the production facilities to another country and import the resulting goods duty-free and tax-free into the free zone.
Therefore, for example, a company could have its goods produced in China and could import them duty-free and tax-free into the free zone and then export the products out of the free zone tax-free again. The profits of the corporation or company thus remain tax-free in the free zone country.
Typical business activities are the handling and storage of goods in (rented) warehouses often already made available by the free trade zone, the packaging and sorting of individual products into smaller quantities or individual packages as well as the inspection of distribution and freight centres and components.
Free Port Area
A free port area is a specific free trade zone which is associated with a seaport or airport. A free port area is created to facilitate the free flow of products without government restrictions.
Free ports allow the duty-free import and export of goods and also guarantee tax exemption. These immense advantages offer companies large financial, fiscal, investment-friendly and regulatory incentives.
As well as this, within the borders of a free port, banking, trade barriers and government standards for staff and employees are more relaxed. Some free ports have even recently created a multimodal transfer of freight to transport systems as a new service option.
Export Processing Zone
An export processing zone is defined as an area in which foreign companies can produce goods for export through special incentives and privileges. These are often industrial areas with tariff privileges that provide financial incentives for foreign investors in export-oriented industrial companies.
Free Trade Areas in the world
The most successful and, above all, the most internationally popular of all free trade areas are in the United Arab Emirates (UAE).
- Ras al-Khaimah Free Trade Zone – RAK (roughly 80km from Dubai)
- Ajman Free Trade Zone (roughly 40km from Dubai)
- Dubai (location with the highest requirements and start-up costs)
Hong Kong is also a special area of free trade. Other free trade areas are located in Lithuania, China, Russia and various other developing countries.
A well-known free port is the area around the Panama Canal. In Germany, there are also still 2 free ports – Bremerhaven and Cuxhaven.
The Free Private Cities Project, who allowed us here at ¨Staatenlos¨ to previously interview Dr. Titus Gebel, also relies on the success of free trade areas. But what are they doing so well? A closer look at the success of the free trade areas in the United Arab Emirates can help us to clarify.
The Advantages of Free Trade Areas in the United Arab Emirates
In a highly regulated and heavily taxed world, it is not easy to be a businessman. At first, you only experience pity, and if you succeed, only envy. You have to shoulder heavy burdens simply in order to be punished more and more for your success. Luckily, there are regions in the world where this is not the case. These include the free trade areas in the United Arab Emirates. There you can enjoy the following benefits that many entrepreneurs only dream of.
- No corporation taxes
- No income taxes with changes of domicile
- No exchange controls
- 100% capital and profit repatriation allowed
- Strong values and fully convertible currency
- A very low inflation rate
- No business taxes or similar fees
- In a free zone, a company can be 100% privately owned
- No trade barriers or quotas
- Straightforward licensing procedures
- Simple guidelines for import and export
- Very liberal labour laws
- Few restrictions on the recruitment of foreign nationals
Further advantages for Entrepreneurs
- Issue of a residential visa for company members and their families
- Business-friendly authorities with an “open door policy”
- Large scope for special permits
- Top infrastructure and advanced drainage and wastewater systems
- Electricity, water and gas available at the lowest prices
- State-of-the-art telephone and internet connections
- Excellent regional and international banks
- Wages well below the European standard ($200 for a part-time worker)
- Geographical location close to the whole gulf and the global markets
- Inexpensive apartments, houses, hotels and sport and recreational facilities
Free Trade Areas in the United Arab Emirates
There is certainly not only one free trade area in the UAE but rather there are several. Convinced by the consistent success of these free trade areas, almost each of the seven Arab Emirates created one – or even several – of these areas. These often differ not only in terms of industries and business sectors but also in terms of costs, licensing and regulation privileges.
In Dubai alone, there are nine free trade areas.
- Jebel Ali Free Zone: includes a free port area
- Metals and Commodities: supports the handling of raw materials
- Dubai Media City: international productions
- Knowledge Village: branches of international universities
- Gold and Diamond Park: gold and diamond trade
- Cars and Automotive: for the automotive industry
- Dubai Maritime City: maritime services
- Dubai Aid City: international health services
- Dubai South: new, large free trade area at Al Maktoum Airport
Further free trade areas can be found in Ras al-Khaimah (RAK), Ajman and Fujairah. Whilst the tax and regulation privileges in all areas are similar, there are indeed special features in some free zones.
For example, anyone who changes their residency to the UAE gets their resident visa much easier via a free zone foundation in Ajman than in the other Emirates.
In general, it is essential to look at the types of licenses offered by the individual free trade areas. For example, you are limited to the free trade zones which correspond to your own business field.
Ras al-Khaimah: industry, trade, imports and exports, services and media
Dubai (Jebel Ali Freezone): trade, industry, services or national industry
Ajman (Ajman Freezone): trade, e-commerce and services
Dubai South: industry, imports and exports, trade, commercial business, consulting and services.
In this article, we will focus on the free trade areas in Ajman, Ras al-Khaimah and Dubai South.
Jebel Ali can be attractive in individual cases but is very complex in terms of both the formation and the issuance of resident visas.
About the Structure of a Free Zone Company
Before we introduce the individual free trade areas, we are going to discuss the structure of the actual company which you want to found there. This is the same at all of the locations – only the costs and types of licensing mentioned above vary.
In general, it is necessary to differentiate between three types of free zone companies.
- Free Zone Company (FZC): at least 2 shareholders are required
- Free Zone Establishment (FZE): only 1 shareholder is required
- Branch: branch office of a pre-existing company
For the purpose of my readers, the FZE as a one-man company is the most interesting. However, the structure, regardless of the business type, is the same.
A free zone establishment is a normal corporation and therefore has limited liability. The name can be chosen freely but must have the consent of the relevant investment authority. Unlike the FZC, it requires only one shareholder and also only one managing director.
Naturally, a free zone business is tax-free. There is a statutory bookkeeping requirement, but no tax liability for free zone companies. However, there is a 7-year document retention requirement, which is usually undertaken by the incorporation service provider.
A big difference to offshore companies like in Ras al-Khaimah (RAK) is the mandatory requirement to keep a physical business premises. For this office space, even if you do not use it, you should calculate at least €300 per month – in this case for a desk in an open-plan office. Many other office packages are available for higher prices. Of course, there is also the option of renting a suitable office for yourself.
The establishment period of a free zone company is relatively long. For this, you should allow around 2-3 weeks. You do not have to be in attendance for this but, at the very latest, you must be in the Emirates to open the bank accounts. Depending on the volume of business, the FZE almost has a free choice of banks in one of the seven Emirates. Required documents are a passport copy and the original version of a consumption bill. Additional documentation may be requested from the relevant authority.
Similar to a RAK offshore company, but even more so, a free zone company in the Emirates is internationally recognised and can, therefore, use most services, such as Paypal, fully. In contrast to offshore companies, a free zone company can also rely on the Emirates’ extensive double-taxation agreements, which have been stipulated with Germany and Austria (among others).
The UAE has a double-taxation agreement with the following states:
- Czech Republic
- New Zealand
Free Trade Areas in Ras al-Khaimah (RAK)
Firstly we will focus on the free zone in RAK that we know about from our last post, before moving on to Ajman and Dubai South.
The Emirate Ras al-Khaimah is the seventh and last Emirate to be incorporated into the United Arab Emirates Federation in 1972. Ras al-Khaimah translates from the Arabic as “top of the tent” and is named after its geographical location, situated on the upper northern tip of the United Arab Emirates and shaped like a tent. With 170,000 square kilometres and 290,000 inhabitants, it is a relatively small Emirate but the population is growing steadily at 5% per year. Dubai is only around 80 kilometres away and is easy to reach. In particular, the emerging tourism plays a role here, along with the free zones.
Ras al-Khaimah has a very large container port and an international airport which have turned the Emirate into one of the most attractive trading centres in the whole region. The RAK free zone has already won several awards, including the Middle East Logistics Award (MELA award) as the “best emerging free trade zone”.
Therefore, RAK is particularly suitable for entrepreneurs who want to relocate an import-export business to the Emirates. More so than in other Emirates, there are excellent conditions for these businesses. With an issued residential visa, these entrepreneurs can still live in one of the other Emirates – for example, in nearby Dubai.
The Ajman Free Trade Area
With 259 square kilometres, the Emirate Ajman is the smallest of the seven Emirates. Ajman is located directly on the Persian Gulf and only roughly 20 kilometres away from Dubai. In contrast to Ras al-Khaimah, there is hardly any agriculture in Ajman and the Emirate survives on tourism and trade. Over 95% of Ajman´s population live in the capital city – also called Ajman and home to over 250,000 people.
In recent years, thanks to a construction boom, Ajman has experienced massive growth. The capital city stretches for about 16 kilometres along the Gulf Coast. As well as the expansion of tourism, Ajman is primarily focusing on the expansion and modernisation of the Ajman Free Trade Zone.
This was founded in 1988 and expanded in 1996 to an industrial park. Due to its proximity to the metropolis of Dubai, Ajman has access to two international airports and four harbours. Ajman´s port is currently being developed into one of the world´s most important maritime centres. At present, the free trade area is being expanded as part of a multi-million investment plan to a size that will enable it to be home to up to 4,000 businesses.
Ajman is particularly interesting for e-commerce entrepreneurs. Furthermore, the Emirate has comparably low costs and makes it far easier for shareholders to obtain a resident visa for tax-exempt residence in one of the Emirates.
The Dubai South City Free Trade Area
Dubai South is a new free trade area in the south of Dubai, the most popular Emirate, and is already an economic hub. The city is also home to the world-famous Al Maktoum Airport, which after its completion will be the biggest airport in the world and also the host of Expo 2020. Above all, this signifies short distance flights – a stopover in Dubai could be enough to see if everything is okay at the office. The airport will have a capacity of 220 million passengers and 16 million tonnes of freight per year.
An advantage of this new free trade zone is not only the excellent accessibility but also the significantly lower costs than in the pre-existing free trade areas in Dubai. To rent the necessary office space here, it only costs around €3000 per year.
Therefore, the Dubai South free trade area particularly appeals to the logistics and aviation industries, but it can also be a fantastic location for consultants, agents, individual services or also for asset protection.
How much does registering of a Free Trade Area Company cost in the UAE?
The cost of a company in the free zones of the United Arab Emirates varies from location to location and is influenced by license type, business activity and other factors. If you are interested in starting a free zone company, do not hesitate to ask for an individual quote via “Staatenlos”.
However, below is an example calculation of the cost of a Free Zone Establishment in the new Dubai South Free Trade Area:
For an establishment in the local free zone, including the option of two investor visas, you should estimate 42,000 AED, so around €10,500. You should also allocate a one-time cost of €400 for the required businesses premises and an annual rent of €3000 for the cheapest office unit along with a telephone connection.
Anyone planning to emigrate to the Emirates as a shareholder has the right to apply for an investor visa. This requires some additional formalities and administrative procedures. For complete relocation of residence, you can expect to pay around 7,000 AED or €1,700.
All in all, a Free Zone Establishment in Dubai South, including relocation, can cost around €15,000 in the first year. From the second year onwards, you should expect to spend about half of this on consulting fees, representation fees, administration management and, of course, the business premises.
However, what sounds like a lot should be considered in the context as a whole. This establishment offers not only a completely tax-free physical company with invaluable advantages but also complete income tax exemption for its shareholders.
Furthermore, residential visas within the UAE have the distinct advantage of having no minimum stay. This means that you do not necessarily have to live in the Emirates if you do not want to. You cannot spend more than 183 days outside of the Emirates. 2 visits per year at your company location are therefore mandatory.
However, anyone who does want to live in the Emirates has a choice of seven diverse locations. Whether Dubai or RAK – some love the small Gulf city, some hate it. This should not deter you from taking advantage of the excellent local opportunities though.
If you are interested in setting up your Free Zone Company, you can get in touch with us and we will gladly help you.
If you prefer to speak about your case first and look for the best option for your business, you can request a consultation with us.